P/B Ratio and significance

The lure of the markets is so strong that an increasing number of investors come flocking with their hard-earned money. The uncertainties, the ups and downs haven't dampened their spirits and investors hope to strike it rich. The adage 'buy low, sell high' works well. So does the good advice 'invest for the long-term'. But certain technical parameters, ratios and numbers is sure to give investors a more detailed picture of the company stock they are pumping their money into. Instead of simply following the crowd, friends or financial advisors, an analysis of numbers will place you in a better position. This approach that involves simple technical analysis and research, ensures your money is not invested in the wrong places. A well-researched investment could be time-consuming. But it assures the safety of your investment, and brings in an element of predictability into the highly unpredictable volatile markets. Price-to-book ratio (P/B ratio) offers a more tangible measure of a company's value than earnings do and hence it is evaluated by most conservative investors. P/B ratio is used to compare a stock's market value with its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value. P/B is equal to share price divided by book value per share. Let us first begin with understanding what book value is. Wondered how much a company is really worth and what is its correlation to its stock price? Book value reflects a company's worth. It can be defined as the company's assets minus its liabilities. If the company pulled its shutters, this number suggests how much would be left after all the outstanding obligations are settled and assets sold off. A company that is performing very well will always be worth more than its book value for its ability to generate earnings and growth. In essence, book value is what would be left over for shareholders if a company closes its operations, pays off its creditors, collects from its debtors, and liquidates itself. Now coming back to P/B ratio, this is a good matrix to value stocks of companies with large tangible assets in their balance sheets. A lower P/B ratio can mean that the stock is undervalued or something is fundamentally wrong with the company. This ratio gives you an idea if you're paying too much for what would be left if the company declared bankruptcy. P/B ratio is particularly useful for value investors, who are always on the hunt for low price stocks that the market has neglected. If P/B is less than one, it normally tells investors that either the market believes the asset value is overstated, or the company is faring very badly in terms of returns on its assets. P/B ratio indicates the inherent value of a company. Many investors have successfully used this to discover dormant stocks, held them over a long term and booked good profits. Though it has its own flaws, it offers an extremely easy tool for identifying clearly under or overvalued companies.

INVEST IN COMPANIES WITH STRONG PARENT-

MAHINDRA & MAHINDRA:

Take M&M , for instance. Over the years, M&M has acted as a holding company for a range of diversification by the Mahindra family. Last year, it listed two of its subsidiaries — Tech Mahindra and Mahindra Financial Services. The management has now indicated its willingness to list Mahindra Holidays & Resorts, Mahindra Systems , its auto components division. All three companies are among leading companies in their respective segments and are expected to get top-dollar valuations. M&M also holds a little over 50% stake in Gesco Mahindra Developers and Musco and 47% in Mahindra Forgings. On the consolidated basis, its five listed companies are estimated to account for as much as 60% of M&M’s current m-cap . The ratio will rise even further if we account for its unlisted subsidiaries. This makes M&M one of the cheapest stocks in the automotive sector.

ICICI BANK& HDFC:

ICICI Bank has managed to place close to 5% of its subsidiary holdings at around Rs 44,600 crore, which is close to half of ICICI Bank’s m-cap . Most of the value in subsidiaries for both HDFC and ICICI Bank comes from their unlisted insurance subsidiaries. These have been witnessing strong growth, with annualised premium equivalent growing at almost 100% YoY, which has created a lot of interest in them. Moreover, strong growth in subsidiaries has also supported higher valuations in these companies. The valuations of subsidiaries comprise around Rs 420 for each share of ICICI Bank. A greater part of this value, which is close to twothirds of the parent company, is on account of ICICI Bank’s insurance subsidiaries, particularly life insurance . ICICI’s life insurance subsidiary is the largest insurer among private insurers and has grown aggressively by over 100% in the past few years. HDFC also has a significant share of subsidiary valuation at around Rs 800 per share. Again, most of the value accrues on account of insurance valuations. Insurance contributes close to Rs 300 per share. The other large contributors include asset management and the 24% stake in HDFC Bank.

RELIANCE COMMUNICATIONS:

The 5% stake sale by RCom values its tower entity Reliance Telecom Infrastructure (RTIL) at Rs 27,000 crore ($6.7 billion). RTIL has close to 14,000 towers under its belt. This means, its enterprise value per tower (EVPT) will be around Rs 2 crore at the current valuation. This is in line with the global trend in telecom tower valuations. In case of RCom, the subsidiary valuation is more than one-fifth of the market capitalisation of the parent company.

L&T:

Its major subsidiaries are L&T Infotech and IDPL. Infotech had recorded a turnover of Rs 1,281 crore last year based on comparable valuations for mid-sized IT companies, the company will be worth Rs 4,000-4,500 crore. IDPL is a holding company for L&T's stakes in infrastructure projects.

SOME VALUATION FIG OF SUBSIDIARIES IN PARENT